And yet there are plenty of reasons to believe that the market is not quite as solid as so many of these experts are telling us.
For one thing, Land Registry figures recently published said that average house prices rose by just 0.1 per cent in July. In the West Midlands, Yorkshire Humberside and Wales, it has recorded a fall in average house prices for two months in a row now.
And, don’t forget, the FT recently predicted the recent crisis in the City could hit London’s house prices.
But, news that should really make the property market commentators sit up came from The Royal Institution of Chartered Surveyors (RICS) yesterday. In the second quarter of 2007 there were 5,120 residential properties sold at auction, the highest number of sales in over two years and a 22 per cent rise on the previous quarter. RICS reckons residential lots offered at auction should continue to pick up and it estimates that repossessions could rise to in excess of 45,000 in 2008, amounting to 124 repossessions per day.
But, what puzzles us is this. Why are there repossessions at all, at the moment? With house prices so much higher today than even a few months ago, any mortgage holder who gets into difficulty could solve the problem by selling up, or perhaps re-mortgaging, The real crunch, though, will be what will happen when house price inflation drops. Even the bulls of the market expect single digit inflation in the sector this year and next. But in two years time, a property owner who gets into difficulty, might well find that lower rates of house price inflation mean they no longer have the option to re-mortgage, or to sell.
We suspect that industry forecasts have totally failed to take this into account when predicting future rates of repossessions.
Many in the industry are quick to point out that the sub-prime market in the UK is more modest than in the US and, goes the argument, UK lenders were more responsible with their lending. The US crisis will not, therefore, spread here, or so they say. But then read this comment from a report produced by ABN Amro back in April. “UK housing looks almost 50 per cent overvalued, compared with 25 per cent in the US. This seems difficult to rationalize, considering trends in employment, income and interest rates.
“Structural factors, such as a lack of supply and migration, don’t appear to explain the premium on UK housing as rents have remained subdued relative to prices.
“So why has the UK not experienced a US-type adjustment? Expectations appear to be crucial. In contrast to the Fed, the Bank of England reinforced expectations of continued rapid house-price gains. But with growing evidence of speculative activity,
the BoE has created the risk of a more disorderly correction in the future.
“The UK economy looks more vulnerable to a housing downturn than the US. Consumers depend more on housing as a source of wealth. The banking sector could also be exposed. Most worrying, if a housing correction undermines confidence in
sterling, the BoE might be unable to cut interest rates to soften the impact.”
But perhaps the most damming piece of news emerged yesterday, when mortgage lenders representing no less than 12 per cent of all UK mortgage lending either upped interest rate charges, or tightened lending criteria.
This is what Fionnuala Earley, chief economist at Nationwide said, “The same person trying to get a mortgage will find the situation more difficult now than three months ago#133;Some lenders will reassess how much they want to lend. You’re not going to stretch yourself for volume in a market you think is a little risky.’‘
And with those words, the market should be trembling. Mortgage lenders came under criticism when they upped their lending criteria so that they were willing to lend at 5 times income. But, even deals of that scale are not enough to enable many to jump on the property ladder. If lenders reduce their criteria, then for most non-home owners, house purchase becomes quite simply impossible.
It all depends on buy-to-let. The figures from Paragon described above suggest this is still a very profitable area. Some people, worried about their pension, especially in the light of recent market turmoil, might decide property investment is the thing for them, driving up the popularity of this form of investing.
But, figures published elsewhere contradict Paragon’s bullish findings. The FT recently said the average buy -to-let investors will enjoy net returns of just 3.5 per cent, after allowing for maintenance and voids. Given that the current rate of interest is 5.75 per cent, that will mean a very substantial deposit before a new buy-to-let investor can cover costs.
High house prices relative to income have created an illusion. They have made us feel better off than we really are. They have fuelled an unsustainable level of borrowings, a short-sighted attitude to pensions, and created inflationary pressure.
All that stands in the way of a dramatic fall in house prices is local authorities and their willingness to grant planning permission. Earlier this week, one tabloid newspaper headlined how house building will encroach on our green belt. And yes, it will; the alternative is homelessness. But if market forces are allowed to work, house prices will crash.
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